Doing International Business in China - Essay Example

Running Head: International Business; Introducing American Consumer Product to China. Doing Business in China College Date China is one of the world’s giant economies and its continued expansion makes placed to become a major economic powerhouse in the future. The country has the world’s largest population estimated at 1.354 citizens currently. Population density stands at approximately 363.3 persons in every square mile of land. The population has placed a significant amount of pressure on available resources forcing the people to work extra hard and stay innovative in order to cope. As a nation, China was quick in responding to the economic recession witnessed in the year 2008 and with a number of strategies put in place the country’s GDP shot upwards by 9.2, 10.3 and 9.2 in the years 2009, 2010 and 2011 respectively. The economy of china has benefitted enormously from investments in fixed assets especially following the two thousand and eight economic downtimes that led to reduction in exports. This growth driven by investment is however not easily sustainable and the government launched the 12th 5YP IN 2011 to take care of this concern. The objective is to up consumption rates to 50% of GDP in 2015 from the 35% as at 2010. Comparing with other nations, consumption drives 70% of America’s GDP and in Brazil it accounts for 63%. Therefore the efforts by china to rebalance its economy are supposed to present fresh opportunities for American companies providing consumer, services and environmental prevention which is given high importance by the 12th 5YP. Even with the gradual slow down in the GDP of china, exports from the US into this market went high reaching $100B in the year 2011 as compared to $91B the preview year. The people’s republic of china remains America’s number two biggest trade partner. Agricultural, forestry and fishery products exportation from America to china went up by thirteen percent between 2010 and 2011 alone. It represents America’s second biggest international market for products in agriculture, fishing as well as forestry and with given the growing earnings, raw material demand & ready foodstuffs, American exports can only be expected to continue growing. China’s fast passed growth particularly in urbanization has come with a boom in terms of market for consumer products for the high end such as education, tourism and recreation. It is poised to take 20% in consumption for luxury products across the world y two thousand and fifteen which translates to $27B. An American firm entering into china for business must consider with seriousness the social and cultural aspects of business with regards to the Chinese people. Penalized relationships or guanxi are very crucial for business. They are so deep in the culture of Chinese people and as such very necessary in getting business going. For any one transaction of business the Chinese counterpart wants to really understand the person with which they are transacting before fully committing to contract. Businesses from America should be cognizant of business & cultural aspect and embrace patience as in some instances a fruitful business relationship can take months to be achieved. An important aspect of doing in business in china will therefore for American in investors or businesses to forge very intimate relations with the counterparts in China as well as relevant agencies of the Chinese government. They must develop very strong personal ties with their distributors, buyers and other product users for a smooth business and expedite procedures with government. Also customers in china go for more localized support from manufacturers e.g. product training or Chinese written manuals; American traders should bear in mind the limitations of using English language in china and do everything to have materials more friendly to users or written in fluent Chinese. Products should be modified to take care of the local Chinese taste, their customs and other cultural systems. China like any other country has its own foreign trade policies and imposes taxes & tariffs to both local and foreign traders in order to raise revenue as well as protect its business environment. Six categories of rates are recognized and by virtue being member to the world trade organization, import products from America are rated as most favored. The tariffs can be lowered very significantly in the event the goods are part of what is identified by government as being important to growth of key industries. Businesses must also contribute business taxes and VAT apart from the traditional tariffs. There is VAT rebate of up to seventeen percent and this is in order to meet industry policy requirements though exporters have often complained of long waits to get rebates or even miscalculation of the amounts. Foreign manufacturers are also since 2007 subject to a 25% corporate tax and as such do not enjoy many incentives in tax. Since 2001 when china joined WTO, many laws were reviewed to comply and also consolidate its role in the economy of the world. But even with these developments, American firms still encounter trade barriers which are approached by the US government through dialogue. In many cases American companies enter china through joint ventures, use of agents, and distributors for which the Chinese government requires a lot of documentation apart from its laws governing profit repatriations. China having set and embarked on meeting tight economic goals as well move significantly towards a free trade economy attracts a lot of competition in the business environment. American companies in chin therefore in agricultural consumer product sections have to endure very stiff competition while doing business. The competition twofold i.e. it comes from other countries coming to china with the goal of making advantage of the cheaply available labor and abundance of raw materials as well as local companies fully owned by Chinese locals. China as a nation has put a significant investment in research and development as well as development of technologies of the 21st century to ensure food security and as such Chinese firms are sufficiently equipped to provide enormous competition to American & other foreign owned investors. Having embraced a more free business environment following its joining of WTO chin has opened doors for many countries to invest there and thus American companies compete for the Chinese market alongside others from other countries. With the many loopholes in the enforcement of laws governing intellectual property rights a significant comes from Chinese counterfeiters who are always there to take advantage of technologies from other companies as their own. Production of counterfeit is still very high owing to availability of technology, ready materials, cheap labor and inefficient law enforcement on counterfeits. China has managed to sustain a tremendous growth in its economy while at the same time steadily expanding domestic market. This makes it a favorite destination of many foreign direct investors. But even with the high potential in terms of market, investors always are apprehensive about returns on their investments owing to the fact that china may not be fully committed to offering a level play ground in the long run. The climate of investment at the moment in china also presents myriad of stumbling blocks for investing foreigners in the forms of policies protecting and promoting Chinese government and other local businesses, industry restriction of foreign ownership, inefficient IPR protection, equity caps, corruption, and a legal system that hardly reliable. China’s legal framework permits the state to encourage selective investment; it can allow investment in those industries and regions it deems prime and restrict foreign investments that are seen as not in the interest of the nation as well as those seen as competing stated favored firms. Many a time’s regulations have gaps with undefined terms and are inconsistently applied. As such barriers to foreign investors are far much more as compared to other first world nations such as America. Chinas investment policy opens doors to foreign investors particularly with the goal of promoting important sectors such as technology, green energy and manufacturing. With the main goal being to encourage domestic technological advancement, projects encouraging domestic innovations are selectively favored. Indications that are that china discourage foreign investment in industries that cause pollution and resource depletion; in the manufacturing sector for instance china strives to makes domestic firms competitive internationally and thus restricts foreign investment. It also protects industries with a history of benefiting from state permitted monopoly and those seen as being important for cultural and social stability. It doesn’t also favor foreign entry for currency trade, in the real estate industry and speculating on assets. The state strives to have benefits of foreign investment to past the rich coast to northern, central and western regions. These regions offer incentives in order to encourage foreign investment in key sectors. The republic of china’s trade policies are particularly focused on growing the domestic economy and social welfare of citizens and thus not friendly to foreign investors. The 5 year plan on utilizing foreign capital for instance promises a thorough microscopic analysis of projects by foreign investors. This plan requires the government to discourage prime Chinese companies from foreign acquisition, deter emergence and growth of monopolies funded by foreign capital, and reduce the misuse of IPR protection that doesn’t favor local innovations and enterprise. Many policies exist which are punitive to foreign investors such as anti-monopoly laws, mergers and acquisition security, restrictions to investment in industry deemed vital by the government, as well as laws barring profit repatriations. The investment environment in china can therefore be really challenging to foreigners given the many restrictive policies, the culture of the Chinese people as well as documentation and licensing requirements to do business. Market entry and product introduction into the Chinese market can be achieved in a number of ways; US companies seeking initiation and or expansion of export to china are welcomed. Investors should begin by visiting and understanding the Chinese market. With fast pace of growth being recorded, visiting china will present a prospective foreign investing with knowledge of business climate, the people’s culture. Company representative from china have great respect for one on one meetings and this is viewed as commitment by US companies to work with the Chinese. Companies aiming at entering the Chinese market should also bear in mind that the country has vast regions which significantly differ in terms of social as well as economic characteristics. It is therefore important for the American firms planning product launch in china to gain earlier information of the geography, Chinese people’s cultures, available resources & labor and the various regions with their potentials. American firms in many cases embrace of use of agents when creating initial relationships; the gents have a lot of knowledge of the market needed for promoting products, penetrating institutions, going past barriers of language and culture. CS provides assistance in finding Chinese contacts for partnerships with American companies through their posts in major cities. They also offer valuable advice in choosing Chinese people to partner with, understanding distributors, consumers, the supply chains and even the advisors available. American companies also can introduce products into the Chinese market by seeking the services of distributors and sales agents who assist in interpreting policies, update on regulations, do market intelligence and promote quick response to changes in the market structure. Firms can also move into china as trading companies thus acquire rights to trade, free from certain controls and discrimination. Another strategy to introduce products into chin for American companies is establishment of representative offices. A company can also enter by franchising through establishment of chains of retail stores all over. This can be done in partnership with Chinese contacts providing technical advice on contracts and nature of business. Other strategies include joint ventures with locally owned firms, direct marketing and selling to government. Marketing of products can done mainly through advertisement which is effective in creating awareness; channels include print media, TV, radio, online marketing and sponsorships. Advertised is controlled by the republic’s advertisement laws outlining type of content and the responsibilities held by advertising firms. Firms should make sure content is good for health and be in line with ethics as well as social and professional standards. Companies can also create product awareness through trade shows and activations in major cities where large populations of people can be reached. The trade events include the US pavilions which is a strategy by the American department of commerce for promoting American products awareness in strategic Chinese markets. Product promotion is therefore not a big issue considering availability of plenty of advertisement channels with widespread audience. The managerial and labor situation in china has been increasingly worrying in the recent times. Media have reported of many cities being faced with labor shortages with manufacturing firms going after people to take up jobs. The shortages reached crisis levels especially in periods around the year two thousand and five and the explanation for the shortage revolves around issues of less conducive work conditions, poor wages, unpaid wages, abuse and more importantly conditions of life in the rural parts as result of better prices for agricultural commodities occasioned by reduced taxes for the same. This can therefore present a hurdle for an American company venturing into china as labor is increasingly becoming expensive with the improving economic conditions and technological advancement which empowers Chinese people to do their own businesses. A hard decision for American companies going to china for business is the financial viability of their ventures. This because alongside the improving economic conditions China has continued to encourage technological innovations and empower its local firms to compete internationally. With many business contracts abroad, Chinese firms have exported a lot of labor hence labor shortages with profits being repatriated back home. This makes it to get local cheap labor in china and thus increasing the cost of setting up a business. Another issue has to do the governments selective policies aimed growing local firms, restrictions on foreign investment in some industries, poor intellectual property protections, unreliable legal systems and laws on profit repatriation increase the cost business. American companies venturing into china must therefore carefully weigh their investment options, go for strategic industries and engage the Chinese authorities in order to get rebates. References. U.S Commercial Service. (2012). Doing Business in China: 2012 Country Commercial Guide for U.S Companies. Read More